The time has come for savvy investors to act, who have long been saving cash to buy when the market crashes.
Indeed, there are several stocks with strong fundamentals currently selling at bargain prices. Though stocks across sectors have fallen, energy stocks have been particularly hard hit. A steep fall in oil prices amid the coronavirus pandemic has been a double whammy for energy stocks.
Three stocks currently selling at attractive prices are Phillips 66 (NYSE:PSX), Enterprise Products Partners (NYSE:EPD), and Kinder Morgan (NYSE:KMI). Each offers a different benefit, but all three are fundamentally strong companies.
Refineries generally benefit if crude oil prices are lower. But that benefit may be outweighed by lower finished product demand, as is happening currently. Lower gasoline demand due to the COVID-19 pandemic is putting pressure on gasoline crack spreads, which is the difference between the price of a barrel of crude oil and the value of that barrel after being turned into finished products. So, while weaker gasoline demand and high inventories may put a downward pressure on refining margins, lower crude input costs should support the margins to some degree.
As the coronavirus pandemic gets under control, gasoline demand should boost. This could be painful and could take some time, but the longer-term outlook will likely improve.
On the other hand, oil prices may jump if Russia and Saudi Arabia agree for production cuts. However, when this happens (if it does happen) remains uncertain. But one thing can be said with certainty: Phillips 66 is one of the top U.S. refiners with impressive earnings growth supported by advantaged crude inputs. So, it should be among the first to benefit as gasoline demand increases.
Secondly, Phillips 66 has one of the highest distillate yields among its peers. That means, Phillips 66 produce more distillate -- think diesel and jet fuel -- per barrel of crude oil it refines, as compared to its peers. Distillate margins are holding better compared to gasoline, putting refineries with a higher distillate yield at a relative advantage. While this will not be the case always, a key strength of Phillips 66's refineries is their ability to manage output mix based on demand changes.
Phillips 66 has a track record of generating impressive returns on capital. A strong balance sheet with a conservative debt-to-capital ratio of 32% equips Phillips 66 to weather the storm that could persist for some time.
Enterprise Products Partners
With its latest distribution increase, Enterprise Products Partners' track record of distribution increases now extends to 63 consecutive quarters. Its strict financial discipline allows it to sustain better in challenging times. In contrast to the typical MLP model, Enterprise Products Partners has started funding its growth projects with cash from operations rather than equity issuances. A huge and diversified asset base allows the company to grow earnings in most scenarios.
That doesn't mean that Enterprise Products is immune to commodity price volatility. It is reviewing its capital expenditure program in response to the lower demand and commodity prices.
The company would do better to defer some of the planned 2020 capital expenditures. Due to its fundamental strengths, Enterprise Products should be one of the first stocks to bounce back as the COVID-19 pandemic subsides. At the same time, the MLP's conservative leverage and strong coverage should allow it to keep distributions intact in these testing times.
Like Phillips 66 and Enterprise Products, Kinder Morgan stock is selling at bargain prices. The latest sell-off has pushed its yield to very attractive levels.
The company's earnings are not as prone to commodity prices as upstream producers. Still, even though the company's earnings are backed by long-term, take-or-pay contracts, its volumes will take a hit when producers slash production.
Kinder Morgan's diversified operations, strong balance sheet, and improved dividend coverage should allow it to sail through the challenging environment. In the past five years, Kinder Morgan has reduced its net debt by around $10 billion. The company expects $2.2 billion in excess distributable cash flow for 2020 after paying dividends. Overall, it's a midstream company that's set for growth in the longer-term, when the effects of coronavirus subside and demand ramps back up again.